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Nicholas Piramal: Roche blues for now

Oct 25, 2004

Introduction to results
Domestic pharma major, Nicholas Piramal, has declared its 2QFY05 and 1HFY05 results. In the quarter, the topline of the company has grown by 2%, while the net profit increased by 7% led by expansion of operating margin, which stood at 21.9%. In the first half of current financial year, the net profit has increased by 25.1%, while topline is down marginally.

(Rs m) 1QFY04 1QFY05 Change 1HFY04 1HFY05 Change
Net sales 3,684 3,757 2.0% 7,456 7,347 -1.5%
Expenditure 2,927 2,934 0.2% 5,890 5,872 -0.3%
Operating profit (EBDITA) 757 824 8.8% 1,566 1,475 -5.8%
Operating profit margin (%) 20.5% 21.9%   21.0% 20.1%  
Other income 48 64 34.5% 99 101 2.5%
Interest 36 49 37.2% 144 72 -50.0%
Depreciation 99 121 21.7% 297 229 -22.8%
Exceptional Items 35 23   156 23  
Profit before tax 635 695 9.5% 1,067 1,252 17.3%
Tax 112 135 20.8% 265 248 -6.5%
Profit after tax/(loss) 523 560 7.0% 802 1,004 25.1%
Net profit margin (%) 14.2% 14.9%   10.8% 13.7%  
No. of shares (m) 38.0 38.0   38.0 38.0  
Diluted earnings per share (Rs)* 55.1 58.9   42.2 52.8  
P/E ratio (x)         18.5  
(* annualised)            

What’s the company’s business?
Nicholas Piramal is one of the leading Indian pharma companies with strong focus in the domestic market. It is the 4th largest company with 4.3% market share in the domestic retail market with a large sales force covering 10 therapeutic segments of the pharma industry. The company has started focusing on the exports market too and the contribution of exports in total sales has increased to 11% from zero in two years time. With its differentiated exports strategy, the company is going to benefit from its cost competitiveness.

What has driven performance in 1QFY05?
Sales:  The sales growth remained subdued in the current quarter. The major reason for this dismal performance is discontinuation of its distribution arrangement for certain diagnostic products of Roche (sales of about Rs 720 m in FY04). Roche will pay US$ 22 m to the company as compensation for the discontinuation of agreement for exclusive distribution. Apart from this, the company has also discontinued distribution and production of six biotech products of Roche (sales about Rs 200 m in FY04).

If we remove the effect of this, the revenue has grown by about 13% in the quarter and 16.5% in the first half of FY05, on a like to like basis. In domestic market, the formulations revenue of the company has grown by almost 6%, which is marginally lower than the industry growth (7%). However, Nicholas has launched 13 new products in the quarter and growth from these brands is likely to come in next few quarters. On exports front, revenues have grown by 67% led by growth in vitamins and bulk drugs exports. However, the sales of vitamins and bulk drugs in domestic market have come down by 39% and 87% YoY respectively.

Operating margins:  The operating margins of the company have gone up by 140 basis points. The discontinuation of Roche's diagnostic equipment distribution business has helped in improving the margins, as it was a low margin distribution business. Apart from that, the improved product mix has helped the company to increase its margins despite increase in staff cost and R&D expenditure. The major savings has come from decrease in material cost, which is function both inventory adjustment and discontinuation of Roche diagnostic distribution business.

Cost break-up
  1HFY04 1HFY05 Change
Raw Material 3,314 2,977 -10.2%
(as % of sales) 44% 41%  
Staff Cost 794 829 4.3%
(as % of sales) 11% 11%  
R&D Expenses 110 212 92.7%
(as % of sales) 1% 3%  
Other Expenditure 1,672 1,854 10.9%
(as % of sales) 22% 25%  
Total 5,890 5,872 -0.3%

Net profit:  The net profit of the company has grown by 7%, which is largely driven by the savings on the operational front. Depreciation charge in the quarter has gone up considerably, due to new facilities becoming operational. The tax provision has also increased in the current quarter.

What to expect?
Nicholas Piramal is a leading company in the pharmaceutical industry, although its past has been marred by choppy topline and bottomline performance. At Rs 978, the stock is trading 18.5x annualised 1HFY05 earnings. While currently, domestic formulations business is the major revenue driver for the company, going forward contract manufacturing is going to be the key driver. However, contract manufacturing is a low value addition business. Currently, the company is entering into an agreement for contract manufacturing at very high margins (operating margins 25%) owing to its low labour and overheads costs. However, these margins may not be sustainable in the long run. After all European contract manufacturers work at single digit margins!

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